SilverBow Resources Inc. has written to shareholders urging them to vote for its incumbents for the SilverBow board and shun persons put forward by disgruntled investor Kimmeridge Energy Management Co. LLC.
As the May 21 annual shareholder meeting nears, New York City-based Kimmeridge assailed Houston-based SilverBow’s acquisition record and nominated three names for independent director roles saying they have the expertise to remedy SilverBow’s growth strategy.
Kimmeridge, an asset manager focused on the energy industry, has taken issue with the rejection by SilverBow’s board of directors of Kimmeridge’s proposal to merge Kimmeridge Texas Gas (KTG) with SilverBow, an oil and gas exploration and production company with stakes in the Eagle Ford Shale and Austin Chalk in Texas.
On April 16 Kimmeridge announced it had withdrawn the merger proposal, which would have created “a preeminent pure-play Eagle Ford shale operator with an estimated enterprise value of approximately $3.6 billion”, as stated by Kimmeridge. The proposal had an equity investment of $500 million from Kimmeridge.
On May 2 Kimmeridge said in a press release, “SilverBow has pursued a failed M&A [mergers and acquisitions] strategy that has put its balance sheet at risk – adding debt and minimum volume commitments that now represent over 96 percent of the Company’s enterprise value – while consistently destroying shareholder value”.
Kimmeridge said SilverBow has underperformed compared to its peers in the XOP exchange, staying in the bottom 10 percent in terms of market capitalization even after eight acquisitions. “SilverBow’s TSR [total shareholder return] has underperformed the XOP following all 8 of their acquisitions, notably -45 percent since acquiring assets from Teal (October 2021); -32 percent since acquiring Sundance Energy and Sandpoint Resources (April 2022); -24 percent since announcing its self-proclaimed ‘transformational’ acquisition of Chesapeake’s South Texas asset (August 2023)”, Kimmeridge stated.
“The lack of M&A experience on SilverBow’s Board was most recently on display with its failed analysis of Kimmeridge’s proposal to combine SilverBow with Kimmeridge Texas Gas”, Kimmeridge added.
“To advance the best interests of all SilverBow shareholders and challenge the existing Board’s status quo mindset, Kimmeridge has nominated three highly-qualified, independent director candidates – Carrie Fox, Douglas Brooks, and Katherine Minyard – for election at the 2024 annual meeting”, Kimmeridge said.
In response SilverBow on Monday penned a letter to shareholders telling them Kimmeridge “continues its self-serving quest to take control of SilverBow and force a dilutive, value-destructive combination with Kimmeridge Texas Gas”.
SilverBow said the proposal to merge with Kimmeridge Texas Gas sought to “bail out” the latter. “Kimmeridge’s proposal to combine KTG with SilverBow undervalued SilverBow while substantially overvaluing its own KTG assets, and relied on a high-risk bet on a near-term return to expensive gas in a period of historic low gas prices”.
Defending its expansion strategy, SilverBow highlighted in the letter, shared on its website, “SilverBow’s EBITDA [earnings before income tax, depreciation and amortization] margin is 12 percent higher than peers”.
“This is a result of operating expenses that are more than 40 percent lower than peers and cash G&A [general and administrative costs] that is more than 70 percent lower than peers”.
For the first quarter of 2024, SilverBow logged $24.07 in EBITDA margin per boe. Quarterly capital expenses totaled $109.5 million.
SilverBow also highlighted it now has a leverage of 1.35x. “Since late 2023, at the closing of our South Texas acquisition, we have reduced leverage and doubled liquidity”, it wrote.
On stock performance, the letter claimed, “SilverBow has delivered 484 percent in total shareholder returns since 2021, significantly outperforming the XOP’s 180 percent”.
SilverBow insisted its M&A record shows a successful expansion with the eight acquisition transactions having resulted in a 75 percent share in the company’s proved developed reserves as of yearend 2023.
Calling on shareholders to back its present leadership, SilverBow added, “With track records of financial, operational and M&A expertise, our directors have led extensive careers as top executives at blue-chip, large- and mega-cap energy companies. SilverBow’s Board has an average tenure of over 30 years in the oil and gas industry and an average of over 35 total years of professional experience.
“Collectively, our directors also bring deep M&A experience at SilverBow and elsewhere, having executed over 250 deals valued at more than $270 billion in the aggregate. All nine of SilverBow’s directors have served at C-suite or senior executive levels at E&P [exploration and production] or oilfield services companies, including five as CEO, three as COO, four as CFO, and one as chief diversity and inclusion officer. Additionally, all nine have had board experience at other public companies, including, but not limited to, at E&P, oilfield services or midstream companies”.
From SilverBow’s board, up for election are Charles W. Wampler, an ex-chief executive at Resource Rock Exploration II; Gabriel L. Ellisor, a former chief financial officer at Three Rivers Operating Co.; Kathleen McAllister, a former chief executive of Transocean Partners LLC.
“By contrast, Kimmeridge’s nominees are self-interested and conflicted, with close ties to or history with Kimmeridge, and lack the blue-chip industry experience of SilverBow’s nominees”, SilverBow claimed. “In fact, Kimmeridge’s nominees have significantly less experience, on average, than SilverBow’s, and one has no E&P experience at all”.
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